How to Refinance Credit Card Debt

Credit card refinancing can make your credit card debt easier to manage in two major ways:

• You might be able to lower the cost of your credit card debt by lowering the interest rate you pay on it.

• Refinancing can reduce the number of monthly payments you need to make. 

We’ll show you the different ways to pursue credit card refinancing and the potential benefits.

What Is Credit Card Refinancing?

Refinancing means using one debt to pay off another. What you accomplish by doing this depends on the type and terms of the debt. 

When you refinance credit card debt, you either move the balance to a different credit card, called a balance transfer, or you use a loan to pay off your credit card balance. In either case, you'll ideally lower your interest rate.

Credit card refinancing vs. credit card consolidation

Credit card refinancing and credit card consolidation can happen at the same time, but they aren't the same thing. Debt consolidation is when you bundle multiple debts together, typically by using one large loan to pay off multiple smaller debts.

For example, if you are using one balance transfer card or loan to pay off multiple credit cards, you are consolidating your credit card debt. The benefit of consolidation is that you can turn multiple monthly payments into one monthly payment. This can simplify your finances significantly, making it much easier to stay on track.

Refinancing typically means replacing a single old debt with a new one.

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3 Ways to Refinance Credit Card Debt

Your options to refinance and consolidate your credit card debt will depend on your income, credit score, and other resources. Here are three of the most common methods.

Credit card balance transfer

A balance transfer is when you move a balance from one credit card to another credit card. The goal would be to get a lower interest rate on your balance, making it more affordable to repay. You can also use balance transfers to consolidate balances from multiple cards onto one card.

Balance transfer cards work best when:

• You have good to excellent credit. A good credit history will help you get a higher credit limit.

• You qualify for a 0% APR offer. The best balance transfer cards offer zero percent interest for 6 to 21 months.

• You have a low balance transfer fee. Most cards charge between 3% and 5% of the total transferred amount as a fee for each balance transfer.

This sounds like a great deal, but keep in mind the following when considering a balance transfer card:

• You can only transfer balances that add up to your credit limit minus the balance transfer fee. For example, if the credit limit on the card is $10,000 and the transfer fee is 5% (making the fee $500), you could only transfer about $9,500. 

• Once the intro APR offer expires, your remaining balance will be charged interest at the go-to rate. The average rate on a credit card is around 24%.

• Avoid making new purchases on your balance transfer card. Focus on paying down your transferred balance before the intro rate expires.

The way to maximize the savings on a balance transfer card is to pay off the balance before the low-interest period expires. In any case, before signing up, figure out whether the money you’ll save during that low-interest period will exceed the costs. Total costs could include balance transfer fees and the excess interest after the low-interest period expires. 

Personal loan

Personal loans can be great tools to use for refinancing credit card debt for a few reasons:

• You can use a personal loan for pretty much anything (within the law).

• Most personal loans have a fixed interest rate. That means a set monthly payment so you always know what you owe.

Personal loans tend to have lower interest rates than credit cards. 

That last point could be the most important. The interest rate on personal loans tends to start at about 8% for people with excellent credit. Many people can qualify for a rate between 16% and 19%. That’s quite a bit lower than a typical credit card. The lower you can get your APR, the more money you'll save on repaying your debt.

The interest rate you can get on a personal loan will primarily depend on: 

• Your credit history

• Your income

• Your existing debt. 

• Whether you can offer collateral 

If you’re refinancing as part of an overall program to pay down debt, a loan might be better than keeping the balance on a credit card. Credit cards generally allow for low minimum payments, which can prolong the repayment period. And, of course, credit cards allow you to add to your debt at any time, which keeps some people trapped in a debt cycle.

Home equity loan or HELOC

Another form of loan that can be used to refinance a credit card is a home equity loan or a home equity line of credit (HELOC). Both use your home as collateral to secure your debt. 

A home equity loan means borrowing a specific amount all at once, and then repaying it over a set schedule. A HELOC works more like a credit card. You can borrow money at different times, as you need it, up to your limit, for the first few years of the loan. If you pay down your balance, you could borrow more.

Using your home as collateral is likely to earn you a lower interest rate than you’d get on a credit card or personal loan. However, there’s a tradeoff. 

Credit card debt is unsecured, and a home equity loan or HELOC is guaranteed by your home. 

With unsecured debt, if you can’t pay your debt, your account may go to collections but you won’t lose your home. If you pay off your credit cards using your home as collateral and then struggle financially in the future, you might risk losing the home. 

Comparison of credit card consolidation methods

Here's a quick look at how the three credit card consolidation methods compare:

Is it a Good Idea to Refinance Your Credit Card Debt?

Refinancing your credit card debt can be a very good idea under the right conditions. Ideally, refinancing your debt should lower your interest rate and/or give your debt more of a structure that keeps repayment on track. 

However, refinancing credit card debt frees up your credit limits for even more credit card spending. This is a common pitfall, and it just makes the problem worse. 

So if you refinance your credit card debt, it’s best to do it as part of a broader debt reduction plan. That should include keeping a budget so you can make your payments and not depend on additional borrowing. 

2 Alternatives to Refinancing Your Credit Card Debt

Refinancing your credit card may not be the right approach for everyone. You might need to consider other approaches if any of the following apply to you:

• You’re not comfortable choosing the right loan or credit card to refinance your debt. 

• Your credit history isn't good enough to qualify you for new credit.

• You wouldn’t be able to afford the monthly payment, even if you refinanced your debt.

If any of the above describes your situation, below are two alternatives you might consider.

Debt management plan

A debt management plan (DMP) involves working with an accredited credit counselor who will help you enter into voluntary agreements with your creditors. The counselor will help you list all of your debts and make a budget. You'll have to agree not to use credit while you are enrolled in the plan.

The counselor will contact creditors on your behalf to negotiate fee waivers or a lower interest rate. These negotiations don’t reduce the amount you owe. Once you enroll in the plan and your creditors approve it, you’ll make a single payment to the credit counseling agency, and the agency will forward a portion of it to each of your creditors.

The payment on a DMP is designed to fully repay your unsecured debts in three to five years.

Debt settlement

Debt settlement, or debt relief, is a process where you negotiate with your creditor or debt collector to accept less than the full amount you owe and forgive the rest. Creditors might be willing to do this if it’s clear that you can’t afford to fully repay your debt. 

You can settle debts yourself or you can hire a reputable company like Freedom Debt Relief and let experienced debt experts do the heavy lifting for you.